International Economic Disintegration

CHAPTER XVII CHANGES IN THE LOCALIZATION FACTORS OF INDUSTRIAL PRODUCTION

BEFORE any balanced judgment can be made on the industrialization of new countries, it is obviously necessary to know how far this process corresponds to a change in the factors of international localization of industries which makes it economically rational to transfer some industrial activity from one point of the globe to another. That part of industrialization which is in accordance with such a change will be “natural” or “normal,” while it is the other (“contrived”) part which represents industrial nationalism in the proper sense of the term.

In the old industrial countries some people were always inclined to regard the existing scheme of international division of labour more or less as a fixed norm and to condemn all changes as mere aberrations. It should be clear, however, that any existing scheme of international division of labour is only the historically determined result of a constantly changing combination of factors. It was a definite historical situation which was responsible for the fact that the textile industry was at one time concentrated in England and a few other countries of the industrial West. Consequently, it would surely be wrong to-day to use the pre-war scheme of international division of labour as a criterion by which to judge the present industrialization of new countries. It would be altogether unlikely that industrial production would to-day still be distributed between the different countries more or less as it was before the war, even if there had not been industrial protectionism. There is no doubt that during the last twenty-five years the localization factors have considerably changed, certainly in a way which deprived the old industrial countries of much of their former superiority in a number of industries. To analyse these changes is a highly important subject of enquiry. At the same time, however, it is so comprehensive that out of the present material only a few indications can be given for the present survey:

(a) Changes in the technique of industrial production have been certainly such as to make a number of industries less dependent on highly trained and specialized labour than formerly. Consequently, the cheapness of labour in undeveloped countries may now represent a real advantage in industrial localization in lines where it did not exist before. This tendency has become so well known to-day that, instead of giving illustrations,1 it is perhaps preferable to point to its limitations. It is not necessary to refute the rather wild idea that technical progress has made it possible from the economic point of view to establish any industry in any country, if only the right machines are imported and the right licences are secured.2 But even in more sophisticated views we find a tendency to underestimate the limitations of mechanized production and to disregard some serious problems, especially that limitation of mechanized production which consists in the fact that the market must be large in order to make the use of highly elaborate machines profitable.3 In the history of recent industrialization there are indeed many examples of industries which had to be given up because of the insufficient size of the market.4 On the other hand, it would be erroneous to believe that the recent development of production technique has invariably raised the optimum size of production and thereby the minimum size of the market.5 These various and largely conflicting considerations make it necessary to analyse carefully the influence of the recent changes in production technique for the separate industries.

Another important limitation of mechanized production in the new industrial countries lies in the obvious fact that it involves the substitution of labour by capital, i.e. by a factor of production which is usually particularly scarce in those countries (cf. c). Finally, it must be said that the changes in the technique of production which favour the international diffusion of industries are probably more important for the spread of industries over the old industrial countries (greater diversification of industries) than for the spread of industries to the new industrial countries.

Now it is generally true that, much as certain changes in the technique of industrial production are democratic in bringing to some extent industrialization à la portée de tous, the old industrial countries will be always somewhat ahead in the progress of production technique. Certain industries, however, have now reached such a degree of technical maturity that further major developments are hardly to be expected. In this case—which may be illustrated by the example of the cotton industry—the new countries have a good chance finally to overtake the old industrial countries.

(b) Changes in the labour factor of localization require careful consideration. The inefficiency of labour in oriental countries has often been mentioned as a serious obstacle to extensive industrialization.6 Experience shows, however, that one would do well not to regard this as a permanent inferiority. In addition to this, it is not improbable that the spread of skill and training is going on now somewhat more rapidly than formerly. This applies also to higher technical knowledge and entrepreneurial aptitude.

(c) Changes in the capital factor of localization are very difficult to determine, since there are two conflicting tendencies. On the one hand, foreign capital imports into new countries have decreased considerably. On the other hand, however, the new collectivist methods of industrialization have increased the internal supply of capital beyond what is provided by voluntary saving. It is recognized that to-day the industrialization of countries like Poland and Yugoslavia is being greatly hindered by the lack of capital.

(d) Changes in the significance of raw material supplies have occurred in several respects. In some cases there is to be observed a growing emancipation from raw materials,7 while in others the places producing raw materials are attracting more and more the refining and finishing industries.8 It is in this connexion that the changes in transportation costs and in the specific value of industrial goods (higher value in smaller bulk) are to be considered. A special but very important point is the effect of changing conditions in the supply of fuel and power resources which seem to have lessened considerably the former rigid localization of industries on the basis of coal resources.9 A final factor is the development of synthetic production of raw materials.

(e) Changes in the consumption factor of localization seem to have led to greater diffusion of certain industries, inasmuch as with the growth of population new consuming centres have arisen, and as a number of new habits tend to favour industries located in greater proximity to markets.

Taking into account all these changes in the factors of international localization of industries, it is clearly impossible to formulate any simplified judgments of general validity. The only possible course consists in analysing one industry after another with due regard to those national differences which further restrict the validity of general statements. Only in such a manner would justice be done to the immense complexity of the problem. The only general truth in this matter is unfortunately a rather trivial one, i.e., that on the whole the changes in localization seem to favour the further diffusion of the simpler consumption goods industries, but that there is no reason to suppose that the tendency for the capital goods and durable consumption goods industries to be highly centralized in the old industrial countries has lost much of its force.

 

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10 If illustrations are needed, the spread of automatic machines in the glass industry (Owen’s bottle machine, Fourcauld’s plate-glass machine) and in the metal industries (the automatic continuous strip mill, automatic lathes, &c.), may be mentioned.

11 It should be added here that the expiration of important patent rights, as for instance in the chemical industry (rayon, nitrogen, &c.), and in the electrical industry (bulbs, wireless sets, &c.), is reinforcing the international spread of modern production techniques. In the same direction works the growing disrespect of patent rights in general.

12 Concerning this and many other problems of industrialization which can be reviewed here only cursorily, cf. W. Röpke, “L’industrialisation des pays agricoles, problème scientifique,” Revue Economique Internationale, July, 1938, vol. iii, No. 1.

13 e.g. the automobile industry in Poland and various industries in Denmark.

14 Cf. Report of the Commission of Inquiry into Banking, Currency and Credit, 1938 (Ireland), Dublin, 1938, pp. 71-73.

15 See: John E. Orchard, The Social Background of Oriental Industrialization: Its Significance in International Trade, Explorations in Economics (Taussig Festschrift), New York, 1936, pp. 120-130; Reinhard Junge, Das Problem der Europäisierung orientalischer Wirtschaft, Bd. I, Weimar, 1915; The World Textile Industry: Economic and Social Problems, I and II, Geneva (International Labour Office), 1937.

16 A very clear and important example of the emancipation from raw materials is the increasing use of scrap iron for the production of iron and steel, a development which has diminished the importance of iron ore deposits as a localization factor of the iron and steel industry. The growth of the iron and steel industry in countries like Italy and Japan is largely due to this circumstance.

17 Outstanding examples of this shift of the refining industries to the raw material deposits are to be found in the rapid development of the production of zinc in Australia, Mexico, and Canada; of the production of lead in Mexico, India, Canada and Australia; and of the production of copper in South America and South Africa.

18 F. Friedensburg, Die mineralischen Bodenschätze als weltpolitische und militärische Machtfaktoren, Stuttgart, 1936; D. C. Kinsman, Our Economic World: A Study of the World’s Natural Resources and Industries, New York, 1937. The development of electric power is, of course, especially important in this respect. It is to be noted, however, that the production of the heavy electrical machines remains highly concentrated in a few countries so that the emancipation from the coal-producing countries and the greater decentralization of industries by electricity appears compensated by greater dependence on the old industrial countries for the delivery of electrical machines. Much the same is true in the case of the internal combustion engine.

• 1Cf. my paper “A Value Judgment on Value Judgments” in which I am explaining my attitude in this very important methodological question. It will probably be published in the “American Economic Review.”
• 2The following pages are largely based on a memorandum which the author wrote together with Professor Alexander Rüstow (University of Istanbul) in the summer of 1938.
• 3See also: W. Röpke, Die entscheidenden Probleme des weltwirtschaftlichen Verfalls, Zeitschrift für schweizerische Statistik und Volkswirtschaft, 1938, No. 4.
• 4In current literature there is already some evidence that the understanding of the scientific situation outlined above is growing. See E. F. M. Durbin, “Methods of Research—A Plea for Co-operation in the Social Sciences,” Economic Journal, June, 1938; A. Löwe, Economics and Sociology: a Plea for Co-operation in the Social Sciences, London, 1935: F. Akerman, Das Problem der sozialökonomischen Synthese, Lund, 1938. The essential things have been said on a wider scientific scale by A. N. Whitehead, Science and the Modern World, New York, 1926; and by Ortega y Gasset, El Tema de Nuestro, Tiempo, Madrid, 1923.
• 5See Der deutsche Aussenhandel unter der Einwirkung weltwirtschaftlicher Strukturwandlungen, l.c., pp. 362-363.
• 6The vast literature on this subject has recently been enriched by M. J. Bonn, The Crumbling of Empire, The Disintegration of World Economy, London, 1938; and by Lionel Robbins, The Economic Causes of War, London, 1939.
• 7See my own approaches to these problems given in the article: “Kapitalismus und Imperialismus,” Zeitschrift für schweizerische Statistik und Volkswirtschaft, 1934, pp. 370-386; and in my book Crises and Cycles, pp. 4-6.
• 8Cf. Röpke, Crises and Cycles, London, 1936, p. 88n.
• 9In anticipation of a probable objection, it may be noted that if the development caused by population increase is put under the heading “extensification,” the “intensification” referred to previously (pp. 11-12) appears inexact. In order to get “net intensification” that part would have to be deducted which is due to “vertical extensification,” an operation which is impossible.
• 10The purpose of this book is to make a new and more promising approach to the diagnostics of that long-run crisis in international economic relations which is one of the most striking symptoms of the general economic, social, and political crisis of occidental society. I believe that the urgent necessity of such an approach has been enhanced rather than diminished by the outbreak of the war. However, I would betray my own philosophy if I regarded this book as anything more than a mere beginning, an invitation to constructive criticism, and a way of opening or furthering a discussion for which the world seems to be ripe. In submitting this book to criticism, I am not afraid to expose myself as one who believes not only in the scientific legitimacy but even in the utmost scientific necessity of employing a measure of judgments, which is ultimately based on a definite conception of what is wrong with the world, and of what should be done in order to put it right again. Those who are shocked by such an attitude may be reassured that I gave more thought to this methodological problem than I am able to explain on this occasion.
• 11(b) This crisis puts social science in a new situation, which is itself highly critical and which no partial investigation in any field of this science whatever can ignore without running the risk of missing its aim. Nobody conversant with the current development of the social sciences can overlook the fact that the feeling of being on insecure ground is becoming more and more widespread, until even the most tenacious followers of the traditional lines of approach sense the need for reorientation. The growing literature on methodological questions even in countries like England, where it was formerly distinctly unpopular, is a sure token of this scientific situation, as is also the fact that it has been felt necessary to open the present report in such a roundabout way as would have appeared rather strange even five years ago.
• 12As the present historical crisis finds its first, its most painful and its most conspicuous manifestation in the economic sphere, and since the nineteenth century has accustomed us to treat the economic problems as the main ones, it is easy to understand why the crisis is conceived primarily as an economic one and why, therefore, the traditional approaches of economics have been relied upon thus far. Whether or not this traditional conception corresponds to the inner convictions of our scholars and statesmen, it is at least exemplified in the character of by far the greater part of scientific activity in our field. Accordingly, men and means have been mobilized, during the last ten years, on an unprecedented scale. Facts have been piled up sky-high; conferences have been held in endless succession; economic analysis has been brought to an ever greater degree of refinement (and, incidentally, to an ever greater degree of unreality); vast and detailed programmes of research have been elaborated; a complicated machinery of institutionalized science has been set up; and questionnaires have been sent to almost every country and to every section of the population. It would surely be no pessimistic over-statement to say that nobody feels that this hectic activity has brought us any nearer the fundamental diagnosis which alone could serve as the basis for effective therapy.
• 13The real cause of this deficiency in the social sciences seems to lie just in the narrowness of our economic conception and the lack of courage and ability in really synthetic interpretation to connect the economic phenomena with the wider aspects of society. There is, in fact, increasing evidence that the real epicentre of the earthquake does not lie by any means in the strictly economic sphere, but rather that the economic disturbances are only the external manifestations of a deeper organic disease, of which overemphasis on economic matters—a legacy of the nineteenth century—is only one of the many symptoms. If that is true, then it becomes clear that the traditional approach is doomed to failure and that a new point of departure has to be found.
• 14That the development of world economy has been, first of all, a process of intensification is as important as it is evident. It can be deduced from the fact that the most highly developed countries showed the greatest percentage of world trade, which, in view of the reciprocal nature of trade, proves that the bulk of world trade must have belonged to economic interchange within the high-capitalistic sphere itself. This deduction is corroborated by a number of calculations of the relative intensity of this “intraindustrial” economic interchange. One of these calculations, made by the Kiel Institut für Weltwirtschaft und Seeverkehr, shows that the commodity trade between the industrial countries of Europe (Belgium, Germany, France, Great Britain and Ireland, Italy, Austria and Switzerland) amounted in 1913 to 30.2 milliard RM (=$7.2 milliard), which was equal to about one-third of the total reciprocal trade between all industrial and agricultural countries of the world. The same story is told by the calculation that out of average total exports of industrial Europe (comprising the same countries) during the years 1909–1913 slightly more than one half (51%) constituted an exchange of goods among these countries themselves. It is also a well-known fact that such leading countries as England and Germany were practically each other’s best customers. In 1913, for example, exports from the United Kingdom to Germany formed 7.74% of the total export trade of the former (higher than the percentage of any other country except British India), while imports from Germany into the United Kingdom as a percentage of the total import trade (11.56%) were surpassed only by those from the United States. Another very interesting illustration of the same tendency is to be found in the development of reciprocal trade between the two leading industrial countries outside of Europe, i.e. the United States and Japan.
• 15There is no denying the fact that world economy and capitalism have been to a large extent forced upon the “new” countries by political pressure and in some cases—as in the opening-up of China—by undisguised war. The problems thus presented are, at the present moment, far from a universally accepted solution; but it seems clear that no satisfactory study of international economic integration and disintegration could evade them. This holds especially true for one of the many aspects of the problem of economic imperialism—the difficult question of whether and how far extensification and intensification of world economy were, and perhaps still are, correlated to each other. In other words, was it not just the spatial expansion of capitalism which kept the whole mechanism of dynamic development going, by providing more and more new markets for the surplus production which constantly increased as productive technique improved, by giving the necessary stimulus to entrepreneurial initiative and speculative optimism and by allowing the “play” essential for any working mechanism? Allowance must also be made for the possibility that the existence of an economic “frontier” in world economy may have been instrumental in providing that psychological atmosphere essential for the breadth of outlook, which is the basis of a liberal commercial policy. This refers not only to the exploitation of new markets, but also to the opening of overseas territories to human settlement. Thus the vast problem of international migrations would also have to be studied in this context.
• 16There is no denying the fact that world economy and capitalism have been to a large extent forced upon the “new” countries by political pressure and in some cases—as in the opening-up of China—by undisguised war. The problems thus presented are, at the present moment, far from a universally accepted solution; but it seems clear that no satisfactory study of international economic integration and disintegration could evade them. This holds especially true for one of the many aspects of the problem of economic imperialism—the difficult question of whether and how far extensification and intensification of world economy were, and perhaps still are, correlated to each other. In other words, was it not just the spatial expansion of capitalism which kept the whole mechanism of dynamic development going, by providing more and more new markets for the surplus production which constantly increased as productive technique improved, by giving the necessary stimulus to entrepreneurial initiative and speculative optimism and by allowing the “play” essential for any working mechanism? Allowance must also be made for the possibility that the existence of an economic “frontier” in world economy may have been instrumental in providing that psychological atmosphere essential for the breadth of outlook, which is the basis of a liberal commercial policy. This refers not only to the exploitation of new markets, but also to the opening of overseas territories to human settlement. Thus the vast problem of international migrations would also have to be studied in this context.
• 17Full treatment of this set of problems must wait till a later occasion. At this juncture let it suffice to emphasize that this is not only important for a full appraisal of the past development, but even more so for a diagnosis of the present situation of world economy and for a prognosis of its future. It is obvious that it would make a tremendous difference if it were really true that spatial expansion (for both goods and men) has been one of the indispensable and irreplaceable springs behind the development of a highly integrated world economy up to 1914. Here, then, is another of those strategic factors we are looking for, though it seems probable, even at the present stage of enquiry, that the result would be a refutation rather than a corroboration of popular views. But, since here as elsewhere popular views are a very important element in shaping actual policies, a convincing refutation amounts in itself to a constructive action. It may be added that, if there is a grain of truth in this theory, the “saving-investment” approach made familiar by recent developments in business cycle theory will probably indicate the most promising direction of analysis. The problem, therefore, will be encountered again in that part of this investigation reserved for the relationship between economic stabilization and economic nationalism.
• 18There is another, though more unusual, sense in which the development of world economy can be conceived as a process of extensification. Spatial extension of capitalism means, in the last resort, not the incorporation of additional square miles, but of additional men living and working on them. The same effect, however, can be achieved by population increase within the orbit of the old trading area; and this is, of course, what happened during the nineteenth and early twentieth century on an unprecedented scale. Spatial (horizontal) extension, then, finds its counterpart in demographic (vertical) extension; and the analysis of both can be largely, though not entirely, conducted on similar lines. Considering the present slackening in the rate of increase of the population of the Western World and the probability that the time is soon coming when this will remain constant, no proof is needed of the importance of an elucidation of this problem for a diagnosis and prognosis of present developments in international capitalism.